1. Field of the Invention
The present invention relates to techniques for forecasting how an asset price, such as the price of a share of stock, will move.
2. Description of the Related Art
Conventionally, many different approaches have been taken to predict how stock and other asset prices will move in the future. These varying approaches often have tended to reflect the forecasters' different philosophies, different investment time frames, different levels of knowledge and skill, and different access to relevant information.
With respect to investment philosophy, for example, the efficient markets hypothesis has received a great deal of attention in the recent past. Probably the most widely accepted version of this hypothesis holds that the market always accurately prices each asset based on all publicly available information. By accepting this assumption, it can be shown mathematically that many of the difficult problems of asset price forecasting disappear, and that the most effective asset management techniques involve little more than managing portfolios so as to diversify away as much risk as possible and then controlling the remaining risk so as to balance an acceptable level of risk against a desired rate of return. Two of the most popular models based on the efficient markets hypothesis have been the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Model (APM).
While at one time nearly universally accepted, at least in the academic community, the efficient markets hypothesis has come under increasing criticism. Thus, the need to individually evaluate the pricing of stocks and other assets is becoming increasingly apparent. Moreover, even to the extent that the efficient market hypothesis holds, better risk measures are desirable in implementing the techniques suggested thereby. It is noted that, in addition to generating wealth for the individual, accurate asset pricing analysis has highly important implications with respect to efficient allocation of society's resources.